What a Surprise – No Firm Signals From Yellen

• Yellen vague and ambiguous
• Fed upbeat on U.S job market
• Fed removed as market risk
• 28% chance of a June hike priced

In Ms. Yellen’s testimony today she did not give the hawks what they were expecting, but on the other hand she was not overtly dovish either. Like any good Central Banker she was extremely “vague and ambiguous” enough to keep markets guessing on when the Fed will move and what the move will be. The Fed bar remains at the “lower for longer” even while a June lift-off remains on the cards.

That being said, nothing appears to have startled U.S policy makers off the trail to rate normalization. During her testimony Yellen struck a more upbeat tone on labor market conditions and included how the forward guidance will be amended. Does this suggest a possible June rate hike?

She focused on the recovery of the labor market being incredibly strong, citing other alternative labor market measures – such as the proportion of part-time workers looking for full-time work – that indicate that the labor market slack is shrinking. Despite specifying that she would like employment, wages and participation to improve she added that growth would be sufficient to keep pushing U.S unemployment lower, even if GDP expansion slows from late last year.

No matter what, Ms. Yellen is laying the groundwork for altering the Fed’s “patient” rates stance. Changing guidance will not signal a rate hike “in a couple of meetings.” But, it would begin a phase were a “change in the target range could be warranted at any meeting.”

Her comments on international economics were a little more upbeat than before. She noted that the collapse in oil prices was mostly about the “increase in global supply rather than weaker global demand.” However, she did warn about the possibility of a slowdown in both China and the Eurozone, but added that the foreign outlook did “not exclusively reflect downside risks.”

Rates Market Skeptical of Inflation Call

What has Yellen managed to achieve? She has basically removed the Fed as a “market risk” for the foreseeable future. Investors and dealers will have to wait and see what her Fed colleagues have to say. Both Dudley and Fisher will have their say this Friday on a monetary policy forum in Chicago.

Thus far, front-end U.S rates are lower post-Yellen testimony. The tepid forecast on inflation rebound is being taken as dovish. The market it seems remains skeptical on the fact that the Fed is “reasonably” confident that the energy impact is only temporary. Fixed income dealers believe that any labor improvements without a simultaneous inflation uptick will be seen as delaying any rate hikes. Currently, U.S FI dealers are pricing in a +28% chance of a Fed June rate hike.